GM. This is Milk Road Macro, your front-row seat to the Fed’s internal civil war—think political soap opera, but with interest rates and inflation on the line.

Here’s what we got for you today:

• ✍️ Rising inflation, labor cracks and internal Fed discord surface

• 🎙️ The Milk Road Show: Why All Roads Lead to Currency Debasement w/ David Brickell

• 🍪 Shell CEO warned of a “huge impact” if Hormuz Strait is blocked

RISING INFLATION, LABOR CRACKS AND INTERNAL FED DISCORD SURFACE

Yesterday was Fed day.

When the whole finance world gathers to watch one man talk a lot but not really say much.

It was the biggest FOMC meeting of your lifetime (until the next one).

We have uncertainty “remaining elevated”, according to Fed members.

A civil war is brewing within the Fed.

And the Trump/Powell tussle continues to rage on.

So what’s going on?

Let’s take a look…

What was the picture heading into the meeting?

As always, the Fed is attempting to balance “stable prices” (low inflation) with “full employment” (strong labor market).

On the inflation side of things, it’s largely about tariffs.

While some people argue Trump’s tariffs will not add to inflation, the general consensus among most forecasters is that they will likely cause a temporary inflation boost (although there’s no sign of it yet).

Rough estimates are that the current level of tariffs would see a peak +1% increase for core PCE inflation.

We also have some new added inflationary pressures bubbling from the Middle East conflict and rising oil prices.

Crude oil prices have jumped, which generally have a big impact on US inflation.

But there are also some very small cracks appearing in the US labor market - weakening at the margin, but still generally OK.

While jobs are still being created, continuing claims are increasing, meaning when people lose jobs, it’s becoming harder to find new jobs.

So what happened at FOMC?

In a development that should surprise nobody, the Fed kept rates unchanged at this week’s meeting.

The market was pricing in a 99% probability of this occurring.

It was very much another “wait and see” Fed meeting.

The Fed says uncertainty (largely around the impact of tariffs) has diminished, but is still elevated (vs May where they believed uncertainty “had increased further”).

Updated Fed projections show both inflation and unemployment forecasts revised higher for this year and next.

Two rate cuts in 2025 is still the base case currently - with cuts unlikely to begin until September.

The signal from the Fed appears to be: “we are not in a rush, but are prepared to cut rates if inflation continues to ease and/or labor market softness deepens” (paraphrasing).

We’re very much in a “one meeting at a time” world right now.

How did asset markets respond?

In an incredibly boring fashion.

The S&P 500 wiggled around during the day but finished essentially flat for the day.

During and after the FOMC press conference, stocks moved marginally lower.

This is actually very typical for an FOMC day.

Here is the average price trajectory for the S&P 500 on Fed days.

Bitcoin also just shrugged and didn’t really do much.

It moved marginally higher after the press conference.

Meanwhile, the Trump/Powell tussle continues

While Powell sits tight in “wait and see” mode, President Trump is adamant that rates should be lower.

He’s called for a “full percentage point” of cuts.

Just hours before the FOMC meeting, Trump said he offered to take “Too Late” (his nickname for Powell) to dinner.

He said: 

• “We have a man that just refuses to lower the Fed rate.”

• “I don’t even think he’s that political - I think he hates me.”

• “And he should, I call him every name in the book trying to get him to do something.”

• “I do it every way - I’m nasty, I’m nice - nothing works.”

• “He’s just a stupid person.”

Powell’s term as Fed Chair finishes in May 2026, and Trump will ultimately decide who the next Chair will be.

Trump has joked he should “appoint himself” to Fed Chair.

That obviously won’t happen, but whoever it is, it’s likely to be somebody very dovish.

Somebody who might slash rates quickly.

The SOFR curve (the way interest rates are expected to change) is currently pricing significantly more rate cuts after Powell is gone. 

There’s now a civil war brewing within the Fed

While the general expectation is for two rate cuts in 2025, a big gap is emerging within the FOMC.

In recent years, the Fed has been very much united, with little internal discord.

This has now changed.

According to the Fed’s dot plot (where members give their expectations of future rate cuts), ten members expect two or more rate cuts this year, likely worried about weakening growth prospects and employment prospects.

While seven members forecast no cuts at all in 2025, likely concerned about inflationary risks.

Bear in mind that Powell’s term as Fed Chair comes to an end in May next year, and Trump wants rates lower.

So, if I was an FOMC member jostling for the big job, I would probably be leaning dovish and calling for rate cuts.

We could be on course for an internal battle of factions at the Fed later this year.

The leadership succession may become a key battleground.

It’s like Game of Thrones, only a lot more boring.

That’s it for this edition - catch you for the next one.

BITE-SIZED COOKIES FOR THE ROAD 🍪

Microsoft is planning thousands of job cuts as it streamlines its workforce. The cuts are expected to largely affect sales roles.

The CEO of Shell has warned of a “huge impact” if the Strait of Hormuz is blocked. Iran has repeatedly threatened to close the integral oil trade route in the event of an attack.

It’s become more likely that the US might get directly involved with the Middle East conflict. Wall Street is bracing for a “knee-jerk” sell-off, should that occur.

MILKY MEME 🤣

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